Home > crisis, financial markets, Keynes > Happy Anniversary Wall Street

Happy Anniversary Wall Street

If I was asked to nominate the wisest aphorism of all time, Mark Twain’s “History doesn’t repeat, but it sure does rhyme” would definitely be one of my top two candidates.

On song, today Wall Street is replaying the 1930s, but to a slightly different meter. With the 80th anniversary of  the Great Crash of 1929 falling on October 29th of this year, Wall Street is celebrating in characteristic style–with a euphoria-led bubble that now appears to be crashing up against economic reality.

Of course, our time is not a mirror image of that momentous period 80 years ago. It’s closer to a mirror image of the days roughly a year later, when the first two bear market rallies that followed the crash finally petered out, and the long slow grind of the Great Depression gradually took hold on the economy and the minds of America.

But in 1930, though on our reckoning the Depression had well and truly begun, the mindset that prevailed was very similar to today’s—that the worst of the crisis is behind us, and economic recovery is underway.


This mindset is on show at the wonderful blog News from 1930, which in honour of this week’s anniversary is publishing news summaries from the Wall Street Journal of 1929 as well as from 1930. Reading newspaper stories from 1930 is remarkable enough on a day by day basis, as comments made about the recovery that was then in place (and the return of the bull market) could easily have been lifted from today’s—or last week’s—newspapers. But to see these juxtaposed with the actual coverage of the Crash of 1929 is all the more startling.

The most obvious chord in the historical song is that very few people realise when they are participants in an event of historic proportions. Even though the Dow had never fallen by anything like what it did in the five days of the Great Crash, the belief that  this would nonetheless turn out to be a rather ordinary event was the dominant perspective, as this excerpt from the Wall Street Journal’s Editorial for Saturday October 26th 1929 indicates:

The market will find itself, for Wall Street does its own liquidation and always with a remarkable absence of anything like financial catastrophe. … Suggestions that the wiping out of paper profits will reduce the country’s real purchasing power seem rather far-fetched.

It seems that only in retrospect was it realised that 1929 was a watershed in world history: few living at the time actually understood that—and none of them had their prognostications published by the Wall Street Journal.

One year later, though the far-fetched had become somewhat harder to dismiss, the general tenor of economic and business commentary was that the worst of the crisis was over, and that 1931 would be a bumper year for the market and the wider economy. This observation in a radio address by General Motors executive and Democratic Party National Committee Chair J. Raskob is indicative of business attitudes in 1930:

In closing, let me say that no country in the world, not even our own, was ever in as splendid position to go forward and enjoy a period of prosperity as our own country is today. Everything has been thoroughly deflated and business is now turning upward. The momentum is necessarily slow at first, but within three months … we will quickly leave depression behind. (WSJ Tuesday October 1930)

The second chord is that the causes and effects of momentous events can be misunderstood both at the time and in retrospect—which leads humanity to repeat its mistakes all over again. Reading the commentary in the 1930, it is clear that the government of the time was doing all it thought possible to prevent the Crash turning into an economic crisis, and it appeared to believe that it had been successful.

The statistics certainly imply that Hoover wasn’t sitting on his hands doing nothing as Wall Street burned, which is the modern mythology. Government debt was equivalent to 30 percent of GDP when the crisis began; just 3 years later it was 70 percent of GDP—and that was when the so-called “automatic stabilisers” were a lot smaller than they are today (because the government sector was much smaller back then).

Yet the view that dominates conventional economic thinking today is that the Depression was caused by a disengaged government and bad monetary policy—if only the Fed hadn’t tightened in 1930, everything would have been fine. In fact, if the Fed did tighten—and the evidence on that is mixed—it was because they, like today’s Fed, believed they had already done enough to avert catastrophe.

Bollocks to that: the problem in 1930 wasn’t the tightening of fiat money, but the preceding failure to constrain the private debt bubble that financed Wall Street’s speculative excess of the 1920s. Yet armed with the misguided belief that there wouldn’t have been a Great Depression had the Fed not tightened in 1930, the Fed of the 1980s-2007 ignored an even bigger bubble in private debt than its predecessor ignored in the 1920s.


By the time Ben Bernanke made his fawning paean to Milton Friedman at his 90thbirthday—“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again”—the Fed had already caused a far bigger crisis by ignoring private debt and the asset bubble it financed.

I’ll finish with my other favourite aphorism: Max Planck’s observation that “science progresses one funeral at a time”. It will take a lot of funerals before the economics profession abandons the follies that led it to describe the decade leading up to today’s crisis as “The Great Moderation”.

  1. November 4, 2009 at 7:03 pm

    It isn’t a need for many funerals. It is a need for something much more difficult: the undoing of reputations. Think of the masters of economics for the past seventy years or so. Think of their contributions. Some of the greatest are the most culpable. Many of them openly laughed at reality. They knew exactly where they were leading us. There is no way to correct their error. All we can do is start over. Literally. Otherwise we all will be seduced by the notion that amendment can somehow push the profession back onto something resembling a real world footing.

    The profession and its inanity gave intellectual credibility to the actions that created the current crisis. It should either clean itself up or pay the price. The one thing we now know with any degree of certainty is that all that ‘clever’ stuff is really dumb.

    There’s no point in engaging the past of economics: it is lost. We simply turn the page on what has gone before and start anew. We take down the statues of the old heroes to make space for the new. And we quietly put all those reputations out to grass.

    That’s what’s exciting about the mess we find ourselves in. No one knows anything other than that our recent history is filled with mistakes.

    • November 5, 2009 at 10:22 am

      Some of those funerals might be of reputations Peter. I’d happily bury Friedman a dozen or so more times, for instance!

      • November 5, 2009 at 4:15 pm

        Agreed on Friedman. I keep a copy of his Essays in Positive Economics on my shelf just to remind me of what not to think.

        The problem we face is that orthodoxy is coherent. Heterodoxy is all over the lot. Until we coalesce around a ‘new core’ – however loose it may be – we cannot challenge those reputations and tear them down.

  2. Jamie Morgan
    November 4, 2009 at 7:29 pm

    Steve, as you say, hsitory doesn’t repeat istelf exactly. I’ve been thinking about the role of quantitative easing since the crisis began – what effect do you think it has had on the equity market rally and how do you see its role in government debt?


  3. November 5, 2009 at 10:21 am

    I think it’s probably added dramatically to the equity rally Jamie. The money hasn’t been lent out–in fact M0 now exceeds M1–but it may well have ended up in trading portfolios.

    I also heard from an ex-research director at a Fed branch that the Fed is considering reverse repos to sanitise the quantitative easing at some point–which means that banks will profit from buying bonds on repos from the Fed at zero counterparty risk. The costs to the treasury here could be enormous–not a problem in financing terms since it amounts to an account entry as Chartalists emphasise, but problematic in that it amounts to the government directly providing profits to the banks.

    • Jamie Morgan
      November 6, 2009 at 8:42 am

      yes, and it is curious that the types of assets bought – more Treasury by the Bank of England compared to relatively more corporate etc by the Fed seems to have had no direct effect on money creation. I don’t think this is something the central banks can be that surprised about given the overall context. This of course raises the issue of what the main function of QE has been if not an expected facilitation of credit creation. It’s a public signal of proactivity, it recapitalises banks, slightly improves liquidity, facilitates gilt markets at a time of uncertainty in the expansion of government debt (though in a contradictory way)… It is, further, an aspect of responses to the crisis that cannot be directly blamed on the lack of imagination of orthodox economists. It is a radicalisation of policy wouldn’t you say? But one where the potential bubble effects in some markets are tacitly being welcomed by policy makers on the basis that they might kick-start sentiment effects that reverse the psychological downward spiral of persistent recession… but does that make it one with the broader potential to recreate the transfer of one bubble to the next (as with the tech bubble to the housing bubble…)?


  4. November 5, 2009 at 9:47 pm

    Maybe one of you can help me with something that has bedeviled me since I first started to dabble in economics (Steve, your “Debunking Economics” was one of the first, and most enjoyable, books I read on the topic). Basically, why do modern economists and economic commentators seem blind to the fact that truly massive governmental intervention into the economy saved the country from the Great Depression?

    Left wing economist Minqi Li succinctly summed up the U.S. experience with and overcoming of the Great Depression as follows: “The short-lived ‘irrational exuberance’ of the 1920s was followed by the collapse of the 1930s. It was the surge of government spending and nationwide planning during World War Two that pulled the US economy out of the Great Depression. After the war, a greatly enlarged government sector and the active employment of Keynesian macroeconomic policies helped to stabilize the profit at relatively high levels.”

    This is quite similar to the conservative Unitedstatesian historian Alfred Chandler, who wrote that after the U.S. entered the war, “[t]he government spent far more than the most enthusiastic New Dealer had ever proposed. Most of the output of expenditures was destroyed or left on the battlefields of Europe and Asia, but the resulting increased demand sent the nation into a period of prosperity the like of which had never before been seen. Moreover, the supplying of huge armies and navies fighting the most massive war of all time, required a total control of the national economy. This effort brought corporate managers to Washington to carry out of the most complex pieces of economic planning in history. That experience lessened the ideological fears over the government’s role in stabilizing the economy [in the post-war economy].”

    But those fears came roaring back, because today Unitedstatesian conservatives – even smart ones – are largely ignorant of the historical examples of massive and successful economic performance turned out when government plays a commanding role in the economy. And not just the United States either – the Soviet Union, China, Cuba, North Korea also experienced excellent, if initial and inconsistent, results with massive government economic intervention.

    So why do conservatives, economists and others get their panties in a collective bunch when they think about unbalanced budgets and the like, when it was massive – unimaginably massive – spending during World War II that successfully put the country on its feet? How do they explain that away?

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